Multi-Unit Franchising: What’s so special about it?
Multi-unit franchising is becoming increasingly popular in the UK and Europe but what is it and how does it differ from single-unit franchising? Here, Natalia Shvarts breaks down some of the key things to consider when it comes to multi-unit franchising.
Multi-unit franchising is where one individual operates multiple territories and/or multiple sites (not to be confused with multi-brand franchising where one individual may be a franchisee of several franchise brands, which incidentally is also on the rise and is also worth talking about but the two are not the same!).
So, what it so special about multi-unit franchising? Well, there are a number of things to consider.
Dealing with one individual. This can be great – from a franchisor’s point of view instead of dealing with two or three or five individuals, you only have to deal with one. This should, in theory saves time, energy and effort. But on the other hand, franchisors need to be careful of the potential shift of the balance of power – the risk being that you end up with one (or several) individuals who operate so many territories/outlets that they can dictate their terms to you and become too powerful for the natural order of the franchise relationship because they represent a high percentage of your income? As any relationship goes through stages, the key to success will be down to maintaining effective lines of communication. The huge benefit is that if you find an individual who is capable, hungry to grow and has the ability and capacity to do so then multi-unit is a great way to expand. It is also an ideal way to keep such individuals motivated, focused and part of your network.
Fees. Should the initial fee be different to what you charge a single-unit franchisee? From a franchisee’s point of view, this is something that they might be expecting as a given, but is that right? The answer is that it depends on what the franchisee is receiving as part of the package and the potential commercial upside. The initial franchise fee (the fee paid by an individual when they first purchase a franchise) usually comprises of several elements, namely: (a) a fee for the licence to use the brand, (b) a fee for the initial training, (c) a fee for any materials, products, advertising & marketing otherwise often described as “franchise package” and lastly (d) initial setting up support. You could argue that if the franchisee is still receiving all of those elements, then the fee should remain as is. The risk is that reducing the fee may devalue your brand and proposition! Having said that, it may be that the franchisee is interested in a territory which is not very popular or has historically been difficult, it may be that you are in fact providing less support – in which case the argument for a discount may be valid. Whatever you do, carefully consider what does the payment cover and whether there is a middle ground – for example, as this is an existing franchisee, maybe you could allow payments in instalments?
Structure & documentation. How you approach this will very much depend on how your franchises are structured. To an extent this will also depend on tax and accounting considerations and hence there will be a need for the franchisor to work closely with its franchisee and their professional advisors. It may be that for the multi-unit franchisee it is more tax efficient to have a group structure. The franchisor would then need to consider whether each limited company within the group is granted a separate franchise agreement with the parent company entering into an umbrella/main contract which connects the separate documents or whether the franchise agreement sits with the parent company and each individual trading entity is issued with an addendum. The exit plan should be considered when deciding on the structure. What if at some point in the future the franchisee decides to sell some but not all of their franchises? This needs to be considered at the outset. In addition, practically, there will certainly be the need to have an additional document which as a minimum addresses the following points:
- Amends the obligations which are typically contained in franchise agreements such as for example dedicating full time and attention to the Franchised Business. Depending on how the Franchised Business is defined, this will now need to be changed accordingly.
- The individual may be centralising and/or sharing some back office or business functions across the separate franchises – this is often one of the advantages for a multi-unit franchisee who can streamline payroll, marketing and other elements. This may need to be carved out depending on the restrictions contained within the franchise agreement.
- Performance, quality and termination provisions should be carefully reviewed and amended if necessary. What if one franchise is performing well but another one, owned by the same individual, is struggling or not meeting the required standards? What if one franchise is in breach? What if the individual is in breach? Should termination of one lead to termination of all, will there be thresholds for this?
- The franchisor may want to impose additional obligations. With the individual being responsible for multiple sites/territories, there is a greater need to ensure that the individual franchisee has the right team structure in place. Consider whether you need to include a contractual obligation for there to be a general or operations manager at each site and if that person leaves that such person must be replaced within a certain timescale.
In summary, there is quite a bit to consider but there are many benefits to such arrangements because it can work so well for the individual franchisee and for the franchisor. The trick, as we have seen from the blogs throughout this series, is alignment of expectations and co-operation. For both parties – don’t fall into a trap of “computer says no” but rather keep an open mind and put yourself in the other party’s shoes – you might be surprised at how things can work out!
By Natalia Shvarts